Carnegie House Land Lease Bummer

Thanks for your input. I originally looked at a unit in this building and thanks to your comment, I nixed it.

hi mssn, thanks, that's very helpful. can you advise how would one get access to the offering plan to research further? thx!

Call the Real Estate Finance Bureau of the Attorney General's Office
at 120 Broadway. Phone # is 212-416-8123. They can provide copies of
all currently maintained plans and of some other plans.

If they dont have the Plan, they cam give you the name and numder of
the plan sponsor and you can call to see if they have a copy/

http://offeringplan.datasearch.ag.ny.gov

An offering plan may also be at www.offeringplanet.com, but often missing recent amendments.

Hi mssn, just saw your post. You are incorrect about the landlease at 100 W. 57th. The coop owns the garage and have step ups in the lease to coincide with the ground rent escalations. The rent escalations are completely covered.
The building has a unique landlease and great financials.

They do not own the retail space. It is separate. One should review the landlease with an attorney. It is a mixed bag.

They sold the retail to cover the land lease jump. what to sell next time?

Chen99: They actually sold the retail years ago due to the old 80/20 income test, not to cover the land lease jump. In fact, they're in discussions to purchase the fee interest in the land right now.

There's background on the retail sale (actually sale of 25% of the co-op's leasehold, covering the retail) at https://streeteasy.com/talk/discussion/34212-land-lease-carnegie-house

NYCRepPro: interesting, this is what a listing broker in this building told us end of last year.

Land-lease building! I loved one of the apartment but my attorney told me that the maintenance will soon be sky-high. If I cannot afford 3 times the maintenance than now, I will lost all my payment and rights to the property and only become a rent-stabilized tenant. Very scary!

Any development regarding the 'purchasing of the fee interest in the land' cited 4 years ago? Any update will be appreciated.

does anyone have a copy of the latest offering and what is the story that was told to them by their attorneys on the latest status of the land lease?

Ruh oh. If true, at almost $1MM per apartment for this ground lease, the building has little or no value.

http://therealdeal.com/blog/2014/11/06/werner-led-group-pays-285m-for-land-under-100-west-57th-street-sources/

To get the latest offering, you can call the NYS attorney general office, real estate division at 120 Bway.

I'm looking at one of the units on sale now but can't make up my mind. If the land lease is such a deal breaker, why are there still on going transactions?

Does anyone know what the post liquidity requirements for this co-op are?

Wow, I went to an open house with my wife w/o a broker almost a year ago to look at an apartments. Couple of months later when we started working with a broker I mentioned this place in passing and he told me "land lease." I had no idea what that meant. Boy do I now! The apartment we looked at a year ago is now in contract almost 30% less. This is some crazy stuff that I didn't even know existed or to ask about years ago when I bought my first apartment. I feel lucky.

Congratulations Corsair. By the way, you make great computer peripherals.

How much do people think monthly maintenance will go up to, and when, when the lease is re-negotiated?
At what price per sq. ft. is it breakeven compared to "no land lease"? (At what price is it a good deal to buy in this bldg?)
25 active sales ($681 per ft² avg, $767,640 avg price)
5 in contract sales ($813 per ft² avg, $805,200 avg price)

like asking, what's a safe amount of Plutonium to keep in your pocket

So, I think I figured out a rough way to price the discount. For a 850 sq ft apt, the current maintenance is $1900, which i estimate $600 of it is rent lease payment. If it goes up by 4x, to $2300, then annual payment is $27,600. NPV of that annual payment for 50y at discount rate of 4% (arbitrarily chosen) is $593,000. So, a normal coop in that area probably is $1200/sf* 850 sf = $1,020,000. So, discounting $1,020,000 by $593,000 = $427,000, or $500/sf. So, if the lease rent goes up by less than 4x, then it's a good deal. But problem is it's a huge unknown.

bluesky, 4% discount rate is too high. It should be 3% or even 30y treasuries are 2.4%. I think if the lease is market priced rent or equivalent (if you have long lease locked in at fixed price or paid upfront the following does not apply), the apts should just trade at building cost which for an old building like this is not more than $400 per sq ft remaining. For a newish building probably $700 per sq ft. Either way, you are thinking about it right. I would not touch a land-lease with a 10 foot pole unless it is fixed price >50 year lease. I know some people will give London example. London landleases have a lot of protections built in for the buyer and one can buy at a good price dictated by fixed calculations which are a part of the law.

I agree with 300_mercer, the risk on the Carnegie House is equivalent to the risk on the United States of America, so yes, by all means, use the 30 year US Treasury bond.

If discount rate is 3%, NPV is 710,000, so discounted price is $1,000,000 minus $710,000 = $290,000, or $341/sf.

I guess people are not expecting a 4x increase in lease rent because recent sales are in $600+/sf range.

The lease escalations are in one of the mortgage of Memo of Lease docs on ACRIS. In one of the threads here an owner said the garage sub-lease's escalations will cover the main lease's.

The leases end in 2046. The co-op will then have no assets.

Take the difference between maintenance and the rent you'd pay elsewhere for the same space in a similar location. Then figure how much you'd pay for a 30-year annuity paying the same inflation-adjusted amount. That's what the shares should cost. Anything more than that represents your hope that the landowner is going to make a gift of the land to the co-op, or will extend the lease, or selling the land off for some other use, or turning the building condo and selling them at whatever the market is then.

Oops, make that "instead of selling the land...."

Blue sky, There are lot of buyers who will lose money. You have to do your own calcs but have to understand full details of the lease terms. Nwt suggests another good one.

wonder if it will go the way of 101 West 23rd Street, http://therealdeal.com/2015/10/21/galil-chelsea-co-op-board-conspired-on-building-sale-residents-claim/

Any updates on the Board negotiating the purchase?

I went there few days ago. The listing said that the co-op board is working on buying the land around 24M. If they got it each unit will pay a one time assessment. For 1 be unit is 800k. Studio 500k. So they approve buyer by their financial status that can pay the assessment.

Was there few days ago and was told that the co-op board is trying to buy the land around 24M.
If they get it. Unit owner will pay a huge one-time assessment like 800k for 1 br unit. 400-500k for studio.
So they approve buyer now who can pay it and have at least additional 500k in hand to make sure one can live there after purchasing the land.

800k to buy land for a one bedroom. What is the final value after purchase of a 1 bed room in somewhat rundown but livable condition?

$900k at most. So 1 bed rooms should be $100k?

I remember when you could get most 1 BRs in there for $100k so guess they have maintained their value. LOL.

Don't forget 101 West 23rd St

Whaaaaa? 24M? Land was sold five years ago for $285M: https://therealdeal.com/2014/11/06/werner-led-group-pays-285m-for-land-under-100-west-57th-street-sources/ Why would the investor now sell it for $24M? It'll take a lot more than that to claw it away from him. I bet the next rent reset is going to be a doozy.

There is a digit missing from that comment. There are 320+ units, so each unit forking over a minimum of $400K to presumably well over $1MM for 2-3 bedrooms yields a very large number. It is hard to imagine that they can get critical mass among that many units to pull this off, but it likely would be worth it, particularly for larger units. If you added $1+MM to the ask for 16C, for example, and thought you could get a 2BR+study/3 bath with terrace and 3 exposures all in for under $2.5MM and then knock probably 35-40% off the current common charges that goes to the current land lease, that would be a rather attractive deal.

In its current condition without the land lease, a 8 foot ceiling post war coop will be no more $1000 per sq ft. And what if the land buyout does not work? You are stuck paying $7k for crappy rental and your purchase price is going to zero. It should be less than $500k.

Sorry stuck paying $4400k per month plus annual assessments.

I think of it differently. Price of land per buildable square foot is $700-1000 in this location. Price of a post war coop in this location on high floor needing gut Reno is $1000 per sq ft. Assuming land will appreciate at the rate of discount rate so that adjustment for not being able to get the land today is zero, it is worth 300 per sq ft to nothing.

I think of it differently. Price of land per buildable square foot is $700-1000 in this location. Price of a post war coop in this location on high floor needing gut Reno is $1000 per sq ft. Assuming land will appreciate at the rate of discount rate so that adjustment for not being able to get the land today is zero, it is worth 300 per sq ft to nothing.

"There is a digit missing from that comment." OK, so maybe the broker said or meant to say that the residents were attempting to buy if for $240M rather than $24M. That at least is within the realm of possibility. I would still treat that as suspect information. Maybe the investors are willing to sell at a loss after five years. More likely, the broker is saying whatever they think will close a sale.
I love all the numbers you guys are running - it is certainly possible that there is an opportunity buried in all the risk and uncertainty. There should always be a price that clears the market, although I wonder if that price should be negative for some of these land lease buildings.
The asymmetry in the bargaining power here is pretty immense. On the one hand, you have a sophisticated group of investors, with access to capital, top legal talent and data crunchers. Presumably not influenced by personal factors like marriages, growing families, divorces, job relocations etc.
On the other hand, you have a few hundred owners with widely varying levels of sophistication, little reason to trust each other deeply, on average extremely capital constrained, and very influenced by personal factors. Somehow they have to find common cause, trust and leadership to take on the pro's. It's a tall order. The buildings that have done it successfully, like Trump Plaza, seem to be higher end buildings with fewer, richer and more sophisticated owners on average, and even then it's a struggle.

I do not disagree with your observation, and intended to make a similar point, albeit different than 300_Mercer. As an aside, the purchase price for the ground lease was $261MM, and presumably any buyout is going to need to exceed that amount, particularly since the current lease payment, even at $4.4MM/yr, is below market.

But I share the view that it is difficult to imagine that a building with widely diverse apartment sizes and current investments can reach a consensus to drop this level of cash on a buyout. For a studio absorbing $400+ of principal, that owner is likely upside down no matter what they paid for the unit. At other end of the spectrum, the owner of a large unit, even at a current "market price," might realize positive value despite paying in excess of $1MM, assuming that the land lease is taken out and the maintenance slashed. In the middle? Who knows, but there will be 320 different opinions on the subject, and this likely is only doable by the coop holding a massive mortgage.

So sport, Since the land purchase is a tall order, will people just walk away rather than pay very high lease payments after 10years when 4mm goes to 24mm at 6% cap. Fair market without landlease is probably $400mm including retail space.

as to the post buy-out value of the units - it would largely depend on what owners decide: Co-op or Condo.
Has anyone recently purchased and gone through the process? Any info to share? Thanks.

In 2018 you had 24 units leave the market: 13 gave up and 11 sold.
This year, so far you have 16 units leave the market: 15 gave up and 1 sold.

That's pretty telling to me as far as where this building is heading. I think psychologically it's going to be hard to convince enough owners to pony up the kind of bucks it will take if they think their units are unsellable (even if it's illogical because the reason they are unsellable would be gone) because too many will perceive it's throwing good money after bad. Plus I think there are probably too many people in the building where the assessment would be significantly more than they originally paid for their units to begin with.

One thing which I don't think has been discussed:
Who holds the retail space (which has to be very valuable)?
Most master leases/sweetheart leases have a provision that the lease is cancelled if ownership is transferred or the Coop is disolved. If they bought the land and converted to either a condominium or cond-op, they could probably sell the retail condominium for a tidy sum (or get a substantial credit from the land owners toward the sale price in return for the space).

I think that the demand for these apartments would be greater if there was more transparency as to what’s actually happening. What’s the worst case scenario - this building turning into another 303 East 57th? Well, apartment prices at the Excelsior are still higher than the 390K for one bedroom with a balcony at the Carnegie. It’s the uncertainty more than anything that’s driving buyers away?

Or it could go like 101 West 23rd St.

101 West 23rd is a quarter of the size - it would be a lot harder to bully 81% of shareholders in a 320+ apartment building into selling at a 50% discount to market. Also, what happens under the new rent stabilization law if the coop goes bankrupt? Does every apartment become rent stabilized forever?

Land Lease is a high complex purchase analysis with changes in input assumptions (future land lease rent increases) putting value into negative zone for a long term holder doing NPV. For a say 10y hold horizon, you have to put a big liquidity discount as well as it is much harder to sell and finance.

Sellers - including the Sponsor - are dumping units. Thinking the buyers of low priced, low quality units in a marginal location (for this product certainly) are sophisticated, deep pockets investors with long term vision is hearing hoofbeats and pronouncing "Zebras!".

30yrs is on fire with the humor these days; I am not on SE all the time, but 3 days in a row got a HA! The velvet rope in front of Denny’s and the hoofbeats/Zebras! It’s the little things these days. As always, props to those on SE who keep it real.

https://streeteasy.com/building/carnegie-house/4n

Say that the market rent on such a unit is $6000 and the commons are $2600. I think that it's 5 years till the land lease resets. One could buy the unit for $200k and be break-even with a free option on a buy-out from the land lease owner.

Assuming you want to live in an estate condition apartment for 5 years without improving it.

So offer $150k and do up to $50k of reno. The asset has value until the reset.

$2600 plus insurance, upkeep, non-lease related assessments and yearly increases. Call it $3100. Simple numbers $3k. 36k benefit for 5 years. $180k less some discounting. $160k less clean up $50k. $100k. Now we are taking. The owner will just rent it out rather than take guaranteed loss. I think land values coming down due to condo glut will help the owner.

Ahh. There is a monthly assessment already.

Ahh. There is a monthly assessment already.
https://streeteasy.com/building/carnegie-house/11m?context%5Bcontroller%5D=%23%3CBuildingController%3A0x00005606846bd3a8%3E&context%5Bcurrent_user%5D=1004028&hide_if_empty=true&section=sales

What happens if your neighbors approve a deal that is not economic for your own unit--can you relinquish shares or are you obligated to pay maintenance until you find someone willing to buy for $1?

I have not read this Offering Plan but most have a provision for any shareholder to relinquish their shares to the Corporation.

Let me throw another question in to the mix. Let us say the land lease rent quadruples. Will the real estate taxes do down as the city will recognize this building has a lot higher expenses than the base line 30 or so percentage of assumed rent roll which for coops is based on other buildings.

"do down" = "Go down".

Unless the real estate taxes responsibility is the land owner's and they are just passed on a rent to the coop.

I don't think so, because for coops and condos they get valued based on comparable rental properties (whereas on rental properties get valued on the I&E statement). If that's the case, then this building's extraordinary expenses don't matter, in the same way as the actual rent roll in those buildings doesn't get adjusted upwards when the income is capped by Rent Stabilization.
Another way of looking at it would be that the Real Estate Taxes should go up when the land lease payment quadruples because the income *for the property* is going up. It's being paid for by a corporation which is leasing the building. Why is it any different than if it were any other corporation leasing the building? For example, XYZ Corporation leases a building for their business. The rent doubles and the Real Estate Taxes go up. Under the standard commercial lease, the increase in taxes is passed along as "Added Rent." So XYZ Corporation pays both the increase in rent and the added Real Estate Taxes caused by the increase in rent.

It seems that taxes are paid to DOF by the landowner. Wonder if they are passed on to the coop as per lease agreement.

Also, how does one compare the prices to 100 W 58 street, which is trading at $1200-1400 per sq ft fully finished condo, if there were not to be any Landlease?

More like 1100-1200 per sq st for a condo (light is better at 100 west 57th but more noise). Puts the value of all apartments close to zero if the coop decides to buy the land at the price current land owner paid resulting in $800-900 per square ft assessment for average un-renovated apartment. Best for the coop to stop paying the land lease payments when it escalates and negotiate a buy out by the landowner for nuisance value.

30, Do we really have a situation where I am more bearish than you? $200 per sq ft Max is my value estimate. Less than 101 West 23rd shareholders got.

Well, the market has gone down.
We haven't spoken about the wider market effect this could have: if this building goes South it will probably be a news story, and a cautionary tale about Land Lease Coops. With the market headed South in general it could end up having a substantial affect on some of the high end new construction land lease coops when the market overreacts and throws the baby out with the bathwater.

I think board will overvalue what a white brick low ceiling building is worth in this location (Max 700-1000 per square ft depending on the floor without new reno; nicely newly renovated apartments another $300-400 per sq ft more) and overpay for the land rather than acknowledge that it is much better to get what they can from the current land owner and let the land be put to better use. Who knows what the rent is as a percentage of land value. Believe it is higher than 6 percent.

I don't disagree that the board will probably overvalue, but I also think the majority of current shareholders have zero ability to come up with the assessments which would be necessary to pull it off and I don't think anyone is going to give an underlying Coop mortgage big enough either.
As I said before my guess is the only way of getting a deal done is by screwing the holder of the retail space (which will happen anyway if the Coop takes the nuisance value of their holdings).

Market going down actually helps the coop as the appraised land value at reset will go down and hence the lease payments.

Btw, I didn’t understand your retail space comment.

The retail space is worth a ton of money. The only way I see the Coop surviving is to find a loophole to screw the holder out if it and trade it to the land owner for a discount or selling it (again) to someone else and using the money to pay for the land.

Thanks 30. So not easy to put a value on the apartments due to retail lease terms, board’s decisions, and how much value they can squeeze out of the land owner due to nuisance value.

What happens if lease runs out and board&landlord haven't worked out a deal?

Theoretically, it reverts. However per the opening comment of the thread, that's not the issue here:

Steep escalation clauses occur every few years which will make the maintenance much higher than other comparable apartments in other buildings hence resulting in lower and lower resales. Even though the lease will run for another 50 or more years the maintenance cost increases will make it difficult for you to hold on to the apartment.

Escalations are a result of fact that land value goes up as the cap rates go lower, but the percentage rent of land value was fixed long time back. So as the cap rates have gone lower, all lease holders with a fixed percentage of market value have gotten screwed. In this case, believe the rent percentage is close to 8 percent.

https://streeteasy.com/building/carnegie-house/17b

$100 per sq ft is the value if needing renovation

I am curious whether the agents are ethically obligated to mention glaring problems. I mean it’s clear they won’t - one only has to look at actual listings - but in theory.

They already disclose that it is land lease. Streeteasy lists that in the description. It is up to the buyer, and their attorney to perform due diligence on lease terms and financials. Final decisions is buyer’s. No one is forcing them to buy it - I know responsibility is gradually becoming a novel concept. Do you really expect the seller’s agent to disclose that your purchase may go to zero?

Speaking to the (well, past-tense now) controversy about Streeteasy offering a paid-third-party agent on the sidebar, this illustrates why it's preferable to steer a casual browser toward anyone but the listing agent.

Irony acknowledged that if they give you a buyer broker who arranged other buys in this building it might not yield much better advice.

Hey you have tons of brokers saying out of one side of their mouths that prices have to come down and at the same time saying buyers should pull the trigger at current prices out of the other.

Dickens, in theory listing agent has to disclose anything material, and most do. But sometimes people will try to get away with murder. I just repped buyers who closed on a purchase where sellers "forgot" to disclose that they were suing their condo board. When the attorney found it, she was like, "are you kidding me?"

ali r.
{upstairs realty}

Ali, Why were they suing the board and why was it a deal breaker?

It didn't break the deal actually -- the buyers did close! It was just this face-palm moment when the attorney was doing due diligence, and found the lawsuit, and our side was like, "ummm, this is material and should have been disclosed up front without the attorney having to find it."

Live on W 57th for less than Harlem -
https://streeteasy.com/building/carnegie-house/8q

Expensive way to buy some appliances---and the listing does not even show them.

They whacked the price from $300K to $100K. Will be interesting to see where the market closes. I continue to believe that this is basically buying a 5-year rental with an option on being able to renegotiate the land lease and stay in the unit.

Perhaps worse if board decided to buy the land say 6 months from now at $900-1000 per sq ft even though this crappy building is not the optimal use of expensive land.

If they can raise the funds needed. They failed already once at doing that. Why would they succeed this time?

I think our value estimates are not far off. $55+/- in rent per month per sq ft for ok condition apartment. $30-35 in maintenance, assessments, insurance etc. $20-25 for 5 years less some discount for pre-paid rent. Give or take $100 per sq ft.

This latest round of prices leads me to believe there is some new information, or at least rumors, that hasn't made it's way to this thread get.

I am a new person to that land lease thing. I see they have a 450 SF studio for 100K cash with 1K maintanance. How much can it turn into? Thanks

Yevgenia, There is not much this thread already doesn’t cover. Your 100k could be zero after the lease expires in 5 years.

Which means you would be paying about 2.6k a month including maintenance for five years. I'm guessing this would rent today for 2.4k per month.

There are assessments.

Can anyone answer these questions?

1. when does the land lease end?
2. what will happen to the maintenance fees? for example, if the maintenance fees are 1100/month right now, what will they be at end of lease?
3. Have they have been negotiating a new deal recently?
4. What are the assessment fees?